How secure is life insurance?

Insurance firms have been plagued by downgrades and investment losses.

State regulations help protect consumers in the event of insolvency.

In today's turbulent economy, there's little left to hang your hat on. Jobless claims are at a 25-year high, stocks continue their volatile course and the housing market remains in the doldrums.

For many families, the only port in the storm are the life insurance products they purchased to reduce their exposure to risk -- from life insurance policies, which provide for their loved ones if the breadwinner passes away, to annuities, which create guaranteed income during retirement.

Trouble among life insurers

With all the ratings downgrades and investment losses plaguing the insurance industry, however, even those seem suddenly vulnerable.

"I've gotten quite a lot of calls from clients," says Brion Harris, an independent financial adviser with Premier Planning Group in Annapolis, Md. "They've seen the news about all the banking failures and are worried the insurance industry is going to be next to say, 'We're not going to be able to honor our commitments.'"

Indeed, in recent weeks the financial strength and creditworthiness of several leading insurers -- including The Hartford Financial Services Group, Genworth Financial and Conseco -- have been downgraded by credit rating agencies Standard & Poor's, Moody's, A.M. Best and Fitch Ratings. They are among several life insurers that have taken steps to apply for funds from the Troubled Asset Relief Program.

And one insurer, Shenandoah Life Insurance Co., in Roanoke, Va., which was licensed to do business in 31 states plus the District of Columbia, announced in February it had been placed into receivership by state regulators to protect policyholders and will attempt to rehabilitate its cash-strapped business.

A moratorium has been placed on the payment of certain claims and benefits, pending review of the company's financial position.

The ongoing high-profile bailout of insurance giant American International Group, or AIG, has only compounded fears of a widespread industry collapse, though its trouble stemmed from losses on bad derivatives bets rather than its insurance division.

So how safe are your life insurance policies and annuities -- and what happens if your insurance company goes belly up?

Industry highly regulated

First, a little perspective.

In most cases, insurance companies under financial duress are simply snapped up by a competitor, and the policies and annuities transfer seamlessly to the new company, with terms and guarantees intact.

Since 1983, when the National Organization of Life & Health Insurance Guaranty Associations, or NOLHGA, was created, at least 70 multistate life insurance companies that were taken over by state insurance departments were ultimately liquidated -- a better track record than most industries. Others were either sold or rehabilitated.

Regardless of outcome, however, the industry itself is highly regulated to protect policyholders.

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For starters, every company that sells insurance is regulated by the state in which it does business. State insurance commissioners require those companies to maintain a reserve fund large enough to meet the majority of its obligations to policyholders.

Steps state regulators take

When a company enters a period of financial difficulty, the state insurance department initiates a process whereby every attempt is first made to help the company return to profitability.

If the company cannot be rehabilitated and is declared insolvent, the insurance commissioner can seek authority to seize its assets and operate the company pending liquidation.

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